Late winter treatignites volatility in natural gas.

Consensus Report: February 02, 2006

Natual Gas and Oil Report

Late Winter Threat Ignites Volatility in Natural Gas while Petroleum Corrects from Iran Fears and Supply Additions.

Technical Outlook: last week we said a close above $9.28, the high close posted over a week ago Friday, would be needed to neutralize bear forces and continue a short-term counter-trend bounce to test resistance at $9.40. This transpired, mainly due to short covering Wednesday , induced from fear of cold arriving next week , which we will discuss in more detail in the next section. However , the rally quickly fizzled to a negative close , leading to further follow-through liquidation today from yesterday’s key reversal from the intra-day peak at $9.82, yielding the negative settlement below support at $8.347. Looking ahead , technical indicators are still negative over all, yet oversold, and we still feel the market is quite vulnerable to and mainly being driven by, weather fundamentals. Wednesday’s key reversal , after a dollar swing from high to low resulting in about a $.60 loss on the day after failing to hold a rally in excess of $.40, was the result of a combination of short covering drying up, only to be quickly followed by a barrage of short-term liquidation of length that was initiated last Friday. The range is now clearly drawn with support at $8.02 scaled-down to $7.75 as sellers are reluctant to hold short positions at these levels , while buying finds strong resistance from $9.40 scaled-up to $9.82 as the Bulls lose confidence at these heights due to hefty existing supply. Look for key pivots at a close below $8.10 or a bullish close back above $9.28 to signify a short-term commitment to a directive trend, and a possible break out of the existing range.

Fundamental Supply Update

Today the EIA announced a draw-down of 88bcfs that was right in line with both estimates by Bloomberg and Dow Jones of 88 and 87bcfs , respectively. It was also above our company call for a draw a 72-77bcfs. The announcement had little influence , except to reiterate the continued dominance of mild weather last week to end January as one of the warmest on record , and encouraged the selling to continue that began yesterday. However , if the technical weakness yields another decline to test recent lows again below eight dollars, we feel the market will return to grossly oversold status, and combined with the below normal cold in the forecast due to impact the eastern US next week, will be too tempting for fund traders that we expect will buy aggressively on weakness , causing another bull reversal likely to rival this past week’s challenge to $9.82. Only a sudden shift of moderation in the forecast would return attention to the heavy supply in the ground and sustain the sell-off. Storage now stands at a more than adequate 2406bcfs , which is 269 above last year and a burdensome 529 or 28.2% above the five-year average of 1877. We still recommend caution to those looking to draw a quick conclusion to Winter and expect a continuous sell-off , while the better part of February remains and could still put a sizable dent in the multi-year surplus if the cold persists longer than two weeks. Remember , this is one of the most dangerous markets to short, especially if weather changes to sustained below normal cold and the hedge funds step in to buy, the short covering alone could once again launch values straight up in a covering panic as this past week graphically demonstrated.

Concerning crude oil, and to confirm our Outlook from last week, a temporary quieting in the tension between Iran and the free world , as the IAEA did not yet declare a decision as to whether to refer the matter over to the UN Security Council seemed to be just enough of a breather for traders to return focus to the heavy US supply. The resulting heavy liquidation brought the first close below $65 in weeks and consummated a noticeable correction from the brief highs above $69 posted recently. Technically , the market was already quite overbought as we said last week and is still within reach of testing our break-out support target at $62 .50per barrel. The EIA update Wednesday was also negative for petroleum . As crude stocks increased by 1.9 million to total 321 million barrels , which is 11.4% above the previous year and well above average is. Motor gasoline also rose more than expected with an increase of 4.2 million leaving supplies at the upper end wall distillates had only inched lower eye 0.2 million and also remain at the upper end of average supply. Refinery operating capacity was steady , near the previous week, holding at 87%, and thus product output changed little as well. In consideration of the supply issue circumstances are clearly short-term bearish , especially in the US, however . This only seems to get the needed attention to affect prices downward when overseas tension eases or changes little overtime. Let’s now take a closer look at the weather with W. S. I. Over the next 6-10 days as the shift to colder could influence the Winter fuels and thus indirectly crude oil values.

W. S. I. Energycast 6-10 day Outlook February 6-12

With the exception of the North Central US, below and much below normal temperatures are forecast over most locations east of the front Range for the balance of the 6-10 day period as a more winter like pattern is expected to become established . Over the central and eastern US. As a result, major temperature changes are anticipated as the colder pattern becomes established. Daytime highs in the twenties and thirties will become more widespread over the Midwest and Northeastern US . Next week. Highs in the thirties and forties will become more commonplace , over the southeastern US. For the balance of the 6-10 day period, the coldest anomalies are forecast over the southeastern US, where anomalies are expected to average between 5-9 degrees below normal. Otherwise, anomalies will average between 2-5 degrees below normal . Over the central and eastern US. In a classical positive PNA fashion, warmer than normal temperatures are forecast over most of the western US and the northern high plains for the balance of the 6-10 day period. Widespread highs in the sixties and seventies will prevail over California and the desert Southwest. Highs in the thirties and forties will encompass the Northwest and Intermountain West. The warmest temperatures, at least relative to normal, are forecast along the west coast for the balance of the 6-10 day period, anomalies are expected to average between 2-6 degrees above normal.

Conclusion.

Natural gas is still in a negative technical pattern , while the mild close out to one of the warmest January’s on record , has returned prices back below the key $8.60 support. However, now quite oversold, with some residual selling likely to bring another test to $8.10-$8.20 , and possibly even lower to test $7.80, and we see the pending below normal cold expected to permeate the high consumption eastern US , as it descends down from Canada, likely to ignite a bull reversal that could accelerate values back up to assault the $9.28 resistance band up to $9.40. Should this reversal transpire , resulting in a close above $9.40, we see a likely short-term challenge to key resistance at $9.82 and possibly within the next three to five sessions! Only a weather induced disappointment, causing a liquidation close back below $8.02 – $8.10 , would negate this Outlook to bearish Range trade and lead to potential new lows at $7.50 to $7.60.

With regards to crude oil, prices are falling prey to a negative technical pattern that suggests a test of the key $62.50 breakout level, that on the first attempt is likely to attract substantial fund buying. As long as the now stale news of Iran and Nigeria tempers or stagnates at current levels, attention will continue to revert back to existing heavy supplies and a negative technical pattern, allowing prices to fall further. However , considering the IAEA continues to meet tomorrow concerning whether to refer the nuclear issue to the UN Security Council for possible sanctions, leaves a strong potential for the heat to be turned back up on the petroleum complex, and quickly! Between the recent surprise victory won by Hamas in the Palestinian government, Iraq in a constant state of violence, and Iran , threatening to abandon all diplomatic measures if their nuclear program is referred to the UN Security Council, makes the Middle East a hotbed of ammunition for volatility. The situation is a like a fuse leading into a Chinese House of fireworks that when lit could ignite oil prices into a skyrocketing, upward launch the likes of which would send inflationary shock waves throughout the global economy, and putting an uncomfortable test on the goodwill and alliances between many nations! Unfortunately , it is beginning to look like a question of when, and not if, this may transpire! Should the decision be made tomorrow to refer Iran’s nuclear ambitions to the UN Security Council, thereby increasing pressure on Iran to act, and we expect prices to resume the upward trend , resulting in a rapid test to $67.50, with a challenge to resistance at $69 per barrel not far behind.

FUTURES AND OPTIONS TRADING INVOLVE RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE.

February 02 , 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744